Why does stock price go south whenever I buy and go north after I sold? Is this a familiar pattern for you? Here is why. It is all about psychology.
Whenever we look at the value (price) of a company’s stock, we are subject to perceptual contrast bias–the tendency to see the stock value different than they actually are. For example (actually happened), when you see AMC stock go up from $22 to $26, you are reluctant to buy this stock because you think that the price is inflated . In the evening news, you hear about the stock and they are expecting to recover its full capacity which has been contracted during the Covid19 era. On the next day morning, you check the price and it has have gone up to $36. Now you think that you should have bought the stock yesterday. In the mid afternoon, the stock price come down a little to $34 and now you think it would be a good deal if you can buy it $31. So you purchased it at $31 expecting its rebound to the high. But the stock closes at $25 on that day.
You regret that you purchased the stock in such a rash impulse. On the next day, the price goes down further to $24. Now you don’t want to sell the stock at such a big loss and decide to keep it until its price go above $31. But the price goes down further to $22 and then $21. Now you become so frustrated and nervous of the big loss, you would be happy to sell it for $23. The next day the price goes to $23. On the following day the price goes up to $25, and to $31 the following day. So you think your selling triggered the upward move of the stock price.
The lessen is that you should invest for long term (say 2-5 years). You don’t want to waste your time, emotion, and money by trying to make money out of frequent trading.
That is why learning technical analysis is so important. Fundamental analysis alone is not enough. Technical analysis can help with the confirmation when open position. Have to practice a lot with demo account in platform that offers you free access like Olymp Trade
Psychology plays a pivotal role in stock trading. The challenge lies in overcoming perceptual contrast bias. I’ve experienced a similar scenario in forex trading with Olymp Trade. Patience is key; consider a long-term investment strategy (2-5 years) to avoid emotional and financial turbulence
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